Some Ways Government Effect the Economy

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Government and economy are two concept that are interrelated. Without a government there is no economy and vice-versa. Likewise the government regulates the economy in many different ways. However two basic government regulation policies are monetary and fiscal policy.

Monetary policy is where the FED attempts to promote price stability by keeping inflation in check and provide money supply in order to keep a sustainable rate of growth. The FED can increase and decrease money supply (MS) based on the type of situation the economy is in at the moment.

To increase MS during a recession the FED can do open market operation and buy bonds. This is also known as OMO Buy. The FED can also lower the discount rate and required reserve rate (RR). To decrease MS during an inflation the FED can do OMO sell, increase discount and RR.

Another policy is fiscal policy. In this type of policy the economy has a greater hand. For expanding the government during a recession, the government increases its spendind, decreases income taxes and corporates taxes.

This increases rGDP which is needed in a recession. In an inflationary period, the government decreases its spending, increases income and corporate taxes. This would decrease rGDP and contract the economy which is the best solution in an inflation period.

The way that provides the most impact on the economy is when the government increases or decreases its spendings. This is because in this economic equation: rGDP= C + I + Gs + Nx or rGDP= Consumer spending + investment + government spending + Net exports, Gs or government spending is the biggest component of the whole equation. If Gs increases then so does rGDP, no matter what happens to the other components because Gs effects the most.

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